Colin Barr

Following the money in banking, economics, and Washington

Moody's warns U.S. on debt ceiling

June 2, 2011: 2:09 PM ET

Moody's put Congress on notice Thursday, warning that it will review the United States for a downgrade if it doesn't see progress on raising the debt ceiling.

The rating agency blamed fractious politicians for failing to address the unsustainable U.S. debt position. Public debt now exceeds 60% of annual economic output and is growing at a good clip thanks to trillion-dollar-plus budget deficits.

The tribulations of the 10-year

That fix seems to call for firm action, but instead what we have is a game of chicken that looks increasingly likely to make Lehman Brothers' collapse look like a lazy afternoon's game of croquet. Thanks so much, John Boehner.

Moody's said the political standoff raises the risk that the government will do nothing to put itself on firmer financial footing between now and next year's presidential elections – which would push the United States another step toward the long feared loss of its triple-A rating.

"Failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place," Moody's said. "At present, this appears the most likely outcome."

The warning comes as investors have been pouring funds into government bonds amid the latest signs that the economy is stuck in slow-growth mode. The 10-year Treasury note traded around 3% Thursday, which is up from yesterday but is otherwise the lowest level in six months. It seems safe to venture that that rate would rise in the event of a downgrade.

Moody's warning follows one six weeks ago from rival S&P, which put its triple-A rating on U.S. debt on review as acrimony over the federal budget increased.

Moody's said Thursday it has expected our congressional leaders to behave badly, but perhaps not like the infants they are showing themselves to be.

"Although Moody's fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations," it said. That is, sadly enough, the only bar anyone in Washington seems able to clear nowadays.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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